When is the exclusion ratio determined

For this purpose , it is immaterial that payments under one or more of the annuity elements involved have not commenced at the time when an amount is first received as an annuity under one or more of the other annuity elements. The amount so excludable shall be allocated to each recipient under such elements in the same ratio that the total of payments he receives each year bears to the total of the payments received by all such recipients during the year.

The exclusion ratio with respect to the amounts so allocated shall be percent. Please help us improve our site! No thank you. Taxpayer A, a 64 year old male, files his return on a calendar year basis and has a life expectancy of The contract provides for variable annual payments for his life. Taxpayer A may elect, in his return for the taxable year , to redetermine amounts to be received as an annuity under his contract as of June 30, For a lifetime annuity, you calculate the exclusion ratio as in a standard, fixed-period annuity contract.

At a certain point, however, you will have collected back the entire initial investment. At this point, the exclusion ratio will fall off and the entire income of the annuity will become taxable. This will occur on a fixed and predictable date. Given the nature of a lifetime annuity, there is uncertainty only as to if and for how long the investor will collect income past the expiration of the exclusion ratio.

A variable annuity works differently since this product is fully exposed to the marketplace. You can calculate the exclusion ratio by dividing the initial investment over the payment period. He pays i. Listen to free podcasts to get the info you need to solve business challenges!

Once that amount is recovered, all future annuity payments are fully subject to ordinary income tax [IRC Sec. The book is co-authored by Stephan R. Leimberg, Martin J. Satinsky, Michael S. These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm. Visit performance for information about the performance numbers displayed above. More Articles 1. Taxation of Annuity Withdrawals 3. After Tax Annuities An exclusion ratio only applies to immediate annuities purchased with at least a portion of after-tax money.

Exclusion Ratio Factors The exclusion ratio is the percentage of the annuity payment classifed as non-taxable income. Obtaining the Exclusion Ratio The actual exclusion ratio for any immediate annuity will be provided by the insurance company that sold the annuity. Considerations The exclusion ratio applies until the after-tax money used to purchase the annuity has been completely accounted for as untaxed income. References Annuity Digest: Annuity Taxes.